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Friday, March 24, 2006

March 24, 2006


REVIEW & OUTLOOK


Flat Tax, Comrade
March 24, 2006

Tax reform is in the air in Beijing, so we'll throw our two renminbi in: Instead of twiddling at the edges, why doesn't the People's Republic adopt a flat tax?

Today, China's tax system -- not unlike the regimes in New York or California -- resembles a bowl of sloppy noodles. A mix of progressive personal income taxes, corporate taxes, consumption taxes, value-added taxes, property taxes . . . well, you get the idea. This week, Beijing's tax authorities announced that as of April 1, new levies will be imposed on luxury goods like yachts and golf balls, in an effort to penalize the rich and redistribute their money to the poor. Oh, and a 5% tax on wooden chopsticks too, to slow deforestation.

What a fiddle. China's newest taxes aren't going to meaningfully impact its fiscal balance, which runs around a 1.5% budget deficit. And who ever said that it was wrong to get rich? Certainly not Deng Xiaoping, who called wealth glorious, thereby firing the starting gun for China's economic miracle.

Listen closely, Comrade: a flat tax is simple. It's easy to implement. It would be easy to monitor, helping to combat rampant local corruption. It would boost tax receipts, giving more room for relief to the rural poor -- something the Party is trying to do anyway. Lower tax rates would stimulate workers to work harder, lifting productivity. And best of all, the Party could sell a flat tax as fair treatment for everyone, which it is. After all, isn't that what the People's Republic is supposed to be all about?

The political left -- meaning whatever Communist ideologues are still around -- will wail that a flat tax is some kind of sinister plot to boost the rich at the expense of the poor. But as much of the enlightened former Soviet bloc has learned, if you're really out to squeeze the rich, the best way to do it is to generate more rich people, and give them more incentive to report their income by keeping rates low.

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